Third parties' claims on insurance moneys in NSW don’t extend to claims made policies

NSW has a law giving third parties so-called direct access to insurance moneys, creating a charge over those moneys. How far does this go? Not as far as you might think, following a decision by the NSW Court of Appeal.

Under section 6(1) of the Law Reform (Miscellaneous) Provisions Act 1946 (NSW), plaintiffs can get a charge (a type of claim) on the insurance money payable under a contract of insurance, but for many years it's been unclear if they can do so if the contract of insurance was made after the event giving rise to the defendant's liability.

The Court has cleared this up by holding that they cannot (The Owners - Strata Plan No.50530 v. Walter Construction Group Limited (In Liquidation) [2007] NSWCA 124).

This is because, it said, the section sets out a process by which the charge arises:

• first, a person has to enter the contract of insurance
• then the event giving rise to the person's liability occurs, at which point the charge arises.

If the contract of insurance didn't exist at the time the event triggering the liability occurred, section 6(1) can't create a charge over the insurance moneys payable under it. Basically, said the Court, you can't put a charge over property which at the relevant time didn't exist, and there's no-one against whom any rights could be asserted.

There has been some doubt about whether section 6 applies to claims made or claims made and notified policies. This decision goes some way to removing that doubt, but also reveals the limitations of the section.

It doesn't however shut off all avenues for plaintiffs. If a plaintiff is suing a company which goes into liquidation, he or she might be able to use the Corporations Act to get priority. There are also similar provisions under the Bankruptcy Act and the Insurance Contracts Act, although all of these provisions have their own limitations.

For insurers writing these policies, the decision means that direct access isn't available under section 6.

It's unclear at this stage whether the decision will be appealed - or if the section will be rewritten to protect plaintiffs suing defendants with claims made or claims made and notified policies. This is certainly an area that requires some further consideration, as there is a lack of uniformity across jurisdictions.